Why Is Warren Buffett Buying Airline Stocks?

SMITH BRAIN TRUST – Warren Buffett once referred to airlines as an investor's "death trap." So why would his Berkshire Hathaway be placing big bets on airline shares? The Oracle of Omaha's railroad strategy offers some clues, says finance professor David Kass at the University of Maryland's Robert H. Smith School of Business.

Berkshire said in a regulatory filing this week that it had grabbed stakes of about $800 million in American Airlines Group Inc., plus about $250 million each in Delta Air Lines Inc. and United Continental Holdings Inc., as well as an undisclosed sum in Southwest Airlines Co. The revelation sent the airline industry's stocks soaring. Kass says the move is reminiscent of Buffett's disclosure in 2007 that he had made multiple railroad stock purchases, which he later exited to buy out Burlington Northern Santa Fe. 

The airline industry "has pretty much rationalized itself, similar to railroads," Kass told Bloomberg on Monday. "They have their sort-of monopoly routes, they can price as they choose to maximize profits, and there are huge barriers to entry." Consolidation in the airline industry, along with lower energy prices, he adds, "would appear to make this industry attractive for long-term investment."

Kass, who will accompany 20 Smith School MBA and MS students to Berkshire's Omaha headquarters to meet Friday (Nov. 18) with Buffett by his invitation, says it's likely that Buffett himself wasn't behind the stock buys. Buffett promised never again to invest in airlines after an unpleasant experience investing in USAir Preferred stock, Kass notes, suggesting it's likely that the recent investments were made by one or both of Buffett's portfolio managers, Todd Combs and Ted Weschler.

The relatively small size (for Buffett) of less than $1 billion in each company, Kass says, offers further hints that it was Buffett's deputies at work.